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Unformatted text preview: VERSION #1 1 M I M E 310 E N G I N E E R I N G E C O N O M Y M I M E 310 E N G I N E E R I N G E C O N O M Y Class Test #2 Wednesday, 21 March, 2007 90 minutes PRINT your family name / initial and record your student ID number in the spaces provided below. FAMILY NAME / INITIAL S O L U T I O N S STUDENT ID # This test consists of 19 multiple This test consists of 19 multiple-choice questions, and three problems requi choice questions, and three problems requiring ing a full solution. a full solution. There are no penalties for incorrect multiple-choice question an- swers. The problems are worth a total of 25 points. MULTIPLE-CHOICE QUESTIONS Circle the correct answer on this test paper and record it on the computer answer sheet. Questions 1 to 10 are worth 3 points each for a total of 30. 1. Which one of the following statements is most correct? A) The discounted payback period method overcomes the problem that the payback pe- riod method has with cash flows occurring beyond the payback period. B) The accounting rate of return method does take into consideration the cash flows be- yond the payback period. C) When selecting the most economical project among a series of mutually exclusive pro- jects, an incremental analysis approach can be used. D) Ranking conflicts can arise if one relies on the IRR criterion rather than the NPV crite- rion when a project has more than one net present value. E) None of the statements above are correct. 2. The internal rate of return of a project: A) is equal to the annual cash flow divided by one half of the project's initial investment when the cash flows are expressed as an annuity. B) changes when the cost of capital changes. C) must equal, for break-even conditions, or exceed otherwise the cost of capital, for a firm to accept the project. D) is dependent on the cost of capital. E) All of the answers above are correct. #20: #21: #22: Total: VERSION #1 2 3. Project A has a higher IRR than that of project B. Both projects have normal cash flows (i.e. preproduction capital expenditures followed by positive production period cash flows). Given a cost of capital that is above the crossover rate (the discount rate at which the NPVs of the projects are equal), A) project A has the higher NPV. B) both projects have the same NPV. C) project B has the higher NPV. D) both projects have the same IRR at the crossover rate. E) None of the statements above are correct. 4. The average total cost is minimised when average total cost equals: A) average variable cost. B) minimum average variable cost. C) minimum marginal cost. D) marginal cost. E) average fixed cost. 5. When projects are mutually exclusive, A) they can only be accepted if capital funds are limited....
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- Winter '08